ITAT Reverses Disallowance of Interest Expense, Rs. 7 Crore Loan Repayment Overlooked:

ITAT Reverses Disallowance of Interest Expense, Rs. 7 Crore Loan Repayment Overlooked The current appeal has been filed by Mahadev Infracon (Appellant) against the Dy. CIT, Circle-3(2)(1) (Respondent) in the Income Tax Appellate Tribunal (ITAT), Ahmedabad “A” Bench before Dr BRR Kumar (Vice President) and Ms Suchitra Kamble (Judicial Member). The case was heard on September 23, 2025, and was decided on November 04, 2025. The appeal challenged an order dated December 31, 2024, passed by the National Faceless Appeal Centre (NFAC), Delhi, for the assessment year 2017-18. On October 28, 2017, the assessee is a partnership firm that filed its income tax return (ITR) for the assessment year 2017-18, declaring a total income of Rs. 19,810,210 based on audited financial statements. On January 27, 2017, the assessee made a short-term investment of Rs. 5 crore in mutual funds, which were redeemed in March 2017 and May 2017, building a short-term capital of Rs. 81,391 in the assessment year 2017-18 and Rs. 819,200 for the assessment year 2018-19, on which tax was paid in the relevant assessment year. Later on, the case was chosen for the purpose of scrutiny and was completed on December 10, 2019, under Section 143(3); therein, the Assessing Officer disallowed Rs. 10,39,500 under Section 36(1)(iii), alleging thereby the diversion of borrowed funds for investment in mutual funds.

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The assessee had invested money in mutual funds. The tax officer said this investment was not connected to the assessee's business. However, the assessee said that the investment was made using interest-free funds, not borrowed money. The assessee also mentioned that during the financial year 2017-18, no new unsecured loans were taken. In fact, old loans worth Rs. 7.15 crores were repaid. Despite this, the tax officer believed that the assessee had used borrowed money to invest in mutual funds. So, the officer disallowed part of the interest paid on loans and added Rs. 10,39,500 to the assessee’s income under Section 36(1)(iii) of the Income Tax Act.

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Dissatisfied assessee then approached the CIT(A); however, it dismissed the appeal. Thereafter, the assessee approached the Income Tax Appellate Tribunal, Ahmedabad “A” Bench. After analysing arguments of both sides and submitted documents, the tribunal noted that it is important to mention that the assessee has already paid back Rs. 7 crore of unsecured loans. They have also paid interest on this loan, and all these details are clearly shown in the balance sheet. In fact, the assessee had also provided full details of the loan repayment and the interest paid, starting from page 62 of the paper book, which was given to both tax authorities. However, both the Assessing Officer and the CIT(A) ignored this information. Therefore, the tribunal allowed the assessee’s appeal.